A community foundation reports $4.2 million of "total revenue" on a single line of its activities statement. Half of it was donor-restricted scholarship money that should have been segregated; the auditors restate, and the change in net assets without donor restrictions drops by $2.1 million. One missing column flipped the surplus story.
The statement of activities is the NFP equivalent of an income statement, but with a twist that does not exist in for-profit reporting: revenues, gains, expenses, and losses are tracked separately for resources the donor restricted versus resources the entity can spend freely. The statement does NOT bury everything in one bottom-line "net income." It produces two changes in net assets, one per class, and a total.
KEY: The activities statement answers a question the donors actually care about: did you grow the resources I restricted, did you grow the resources you control, and did you honor my restrictions when you spent. A single net-income line cannot tell that story.
Common mistakes
- Charging an expense to the with-donor-restrictions column. A purpose-restricted gift of $90,000 is spent on the qualifying program. The candidate records the $90,000 program expense in the with-restrictions column to "use up the restriction." The release line goes missing entirely.
- Combining contributions on a single line. "Contributions $1,470,000" with no class split. ASC 958-205 requires by-class presentation on the face of the activities statement. The exam answer that lumps everything together is the trap, it looks cleaner but is non-compliant.
- Treating board-designated endowment income as restricted. Board votes to set aside $3,000,000 as a quasi-endowment. The board can undo its own vote, so the principal AND the investment returns stay in without-donor-restrictions. Trap: classifying the $140,000 of returns as donor-restricted overstates the with-restrictions change by $140,000.
Bottom line
- Two columns: net assets without donor restrictions and net assets with donor restrictions; each rolls forward beginning to ending, showing revenue, expenses, reclassifications, and the period change.
- Reclassifications (releases from restrictions) net to zero across the columns and never appear in the Total column; they are internal transfers, not revenue or expense.
- All expenses report in the without-donor-restrictions column; restricted resources are released via the reclassification line then expensed, never charged directly against restricted net assets.
- ASU 2016-14 requires expense reporting by both nature and function, in the activities statement body, the notes, or a separate statement of functional expenses.
Exam shortcut
When you see an NFP activities statement question, sketch the two-column grid before computing anything: Without Restrictions on the left, With Restrictions on the right, expense rows only on the left. Then place each item by donor intent. Releases always net to zero, if your two columns of the release line do not equal and opposite, you misclassified an expense or contribution.
The full lesson (about 5,270 words, 35 min read) adds 8 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- I.B2
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